Gold and Cryptocurrencies, Friends or Foes?

Mon, 10/22/2018 - 14:24

In March 2017, the value of bitcoins surpassed the price of gold by breaking the US$1,200 benchmark. For the first time, debate emerged over its potential to replace the precious metal as a safe haven for investors. “Cryptocurrencies are attractive because some people worry about currency risks inherent to sovereign currencies,” says Trevor Turnbull, Director of Gold and Precious Metals Global Equity Research at Scotia Capital.
For the mining industry, it is difficult to predict whether Bitcoin will bolster gold or undermine its value. Several experts have indicated that a negative relationship exists between gold and Bitcoin. “Toward the end of last year, we started to notice that correlation turned at least mildly negative,” RBC Capital Markets analyst Chris Louney told CNBC in February 2018. If a negative correlation does exist between gold and Bitcoin, it could be one of the factors behind gold’s stagnation in the last year, with prices struggling to break through the US$1,300/oz ceiling.
There have even been suggestions that Bitcoin will eventually replace gold entirely as a store of value. John Pfeffner, Partner at UK-based Pfeffer Capital said at the Sohn investment conference that if Bitcoin displaced just 25 percent of foreign reserves, the total worth of the Bitcoin network would be around US$6.4 trillion. In comparison, the World Gold Council says the value of all gold ever mined is about $7.8 trillion. “Bitcoin is the first viable candidate to replace gold the world has ever seen,” says Pfeffner. “So, if Bitcoin becomes the dominant nonsovereign store of value, it could be the new gold, or new reserve currency.”
Although this seems like bad news for gold miners, the mining industry seems positive about the possibility to find unique ways to collaborate through gold-backed cryptocurrencies. “The growth of the cryptos is a vivid illustration of how much speculative money exists around the world,” says Rob McEwen, Chief Owner of gold operator McEwen Mining. “This is a product of massive monetary expansion, low interest rates globally and the disruptive nature of the digital world.”
To take advantage of the appeal of cryptocurrencies, Tradewind Markets, a technology provider supported by Sprott, Goldcorp and IEX, launched a digital gold trading platform in March 2018. It relies on Vaultchain blockchain technology that offers an unbreakable record of transactions and account balances. Is additionally backed by the Royal Canadian Mint, which is providing storage for physical gold.
Mexico is the world’s eighth largest producer of gold. After a prolonged dip, BMI Research predicts that Mexico’s mining industry will be among the Latin American countries to experience one of the fastest recoveries, with gold projected to make up 34.1 percent of the country’s total production, according to CAMIMEX. Although silver is king, Mexico is also a gold country, with much unexplored territory over the Guerrero gold belt.
Octavio Alvídrez, CEO of Fresnillo says that, while cryptocurrencies could have several applications, they would never replace gold. “Gold, from ancient times to now, has been an indisputable store of wealth and also a way to hedge against geopolitical volatility and inflation. It is a well-regulated and established market,” he says. “Gold has a well-established role in the market while cryptocurrencies still have to be regulated and understood to compete with precious metals.”